The Mortgage Industry Has Changed!! Thank God!!

 

Gone are the days that one can get a mortgage with the only criteria being that they are breathing!!  The Democratization of lending is over and 6000 years of holding a borrower to certain truths has made a comeback.  It could not come too soon.  First of all the well founded criteria of "What have you got in the deal"? is back.  That is to say that there are no 100% mortgages anymore...currently.

 

I used to know a lot about the lending industry and what I did know scared me.  Sometimes clients come to me and already have a mortgage originator relationship.  Sometimes it is a bank and sometimes it is a mortgage broker.  With 100% consistency when I would ask them, how much is your broker making off your loan, they had not a clue.  It never even occurred to them to ask.  With 100% consistency I would inquire how the mortgage originator got paid and they could not even answer that question.  The flip side to purchasing an asset in the hundreds of thousands of dollars is that when you do find a home you want, then you ought have some idea beyond superficial cursory facts about the loan you are going to get in the amount of hundreds of thousands of dollars to finance your purchase.  This makes sense doesn't it?  As in possibly dollars and cents,... right? Contact Me.

 

Lets start with some basic understandings of what the process is.  When you are getting a mortgage loan, you are purchasing the use of money.  The purchase price is the interest you pay AND the other expenses you pay to get a particular amount of money beyond the interest rate.  What expenses are those you ask?  Well there are lender expenses, there are title company expenses, and there are expenses paid out side of closing, such as a year in advance payment for your fire/hazard insurance.  But lets focus on the mortgage part of this.

To me the first question is how much is your broker making?  These days they must disclose that to you in writing in advance..  They didn't use to have to do that and it was one of dark secrets of the industry.  Shockingly there were some pervasive abuses.  Well now they have to disclose to you in writing in advance.  So how much is fair compensation for a mortgage originator.  This of course is open to debate depending on who you are.  Everyone is entitled to keep the wolves away from the door.  There are basically 3 types of originators in the mortgage world.  The banker mortgage originator, the mortgage broker working for a non bank lender, and the independent mortgage broker.  Don't kid yourself the independent mortgage broker offers the most likely possibility of securing the best rate for the least amount of money.  Why you ask? Contact Me.

 Because they don't have to split the money made with their employer.  Getting a mortgage from an independent mortgage broker does not necessarily mean that you are getting the best rate for the least amount of money, it just means that you are most likely to be able to get the best rate and the least expense.  But lets break this down a bit.  We will start with rates.

Lets presume a  couple of things.  First you have a credit score of 740 or better.  This is the score at which the best rate is offered by the wholesaler of the money to the broker from whom you are getting ...'er buying your money.  Yes that is right.  You buy the money from your broker, who has bought you the money but for a cheaper cost than what he is charging you.  He is a middle man.  That is why he is called a broker, just like I am called a broker. We both help you find something you want and then sell it to you.  Still the question is how does the broker charge you money on say a $200,000 loan.  Well, it is a function of the interest rate at which you are being offered by the broker.  Let's say he/she is offering you a 4% rate on your loan.  The wholesaler from whom he is getting the loan is for example paying him 2 points if he can get you to agree to take the loan of $200,000 for 4%. 

What you ask is a point?  Well it is 1% of the mortgage/loan amount thusly 2 points on a $200,000 loan is $4000.00 the broker would be making if he closes your loan.  He would have to disclose that to you in writing in advance.  Your payment would be $951.66 presuming a 30 year mortgage.  So there you go, you get a loan for 4% and you do not have to pay your broker any out of pocket money because the wholesaler with whom he is placing your loan has agreed to pay him 2 points or $4000.00. Contact Me.

So the question is what is a fair value of compensation for a broker/mortgage originator.  A banking mortgage originator is only getting some of that $4000.  Maybe a 1/3 unless they have hit their bonus level in production, upon which they would get more.  It is the same for the mortgage originator who works for companies you hear advertising on radios.  They get some...maybe half, and then more once they hit a bonus level of production.  But the independent mortgage broker gets it all.  Frequently he is processing his own loans and working out of his house.  So no office over head not secretary, but he is doing all the leg work, the grunt work for which the share of the other two choices goes to pay others who are doing the leg/grunt work on your loan package.

So what is the point of knowing all this.  An independent mortgage broker is in a better position to offer you a mortgage rate of 3.875% and if he is giving his wholesaler a lesser rate of return then of course the wholesaler is most definitely paying him less than 2 points or $4000 offered for the 4% loan.  So you can see how this works.  If you get a competent independent mortgage broker, that is where you most likely get your best rate.

There is never a dramatic difference in rates being offered by different lenders.  All things being equal the spread might be 1/4 maybe 1/2 of a point for the same rate.    But small differences make a lot of difference over the life of a 30 year loan in the $10,000 of thousands of dollars paid in interest.  The point is you want to pay attention to what going rates are and to insure that you get the best rate possible for yourself.  Between you and your mortgage originator, you are a customer, not a client.  That is important to note.  He could be selling you a tv, a car, pencils or a mortgage...there is no fiduciary relationship.

There are other subtleties.  If you want to understand more, check out the tabs on the left for additional information or just contact me.  A good one is the break even tab.